China's extra power fees for aluminium smelters not likely to boost prices

Wed Jan 8, 2014 4:50am EST

* About 1.7 million tonnes of capacity liable for higher power costs -analyst

* Affected smelters to trim unit consumption to meet standard -smelters

* Domestic prices expected to stay weak until 2015 -smelter

By Polly Yam

HONG KONG, Jan 8 (Reuters) - China's additional power tariffs aimed at energy-hungry aluminium smelters are not likely to boost prices for the metal as enough new capacity is coming on line to replace any plants forced to close due to the increase in costs.

Top aluminium producer and consumer China imposed extra power tariffs this month on smelters using more than 13,700 kilowatts (KWs) for each tonne processed, part of a scheme to close inefficient plants and rein in overcapacity.

The additional power fees could raise costs by as much as 1,100 yuan ($180) per tonne for some smelters. Around 1.7 million tonnes of aluminium smelting capacity would be liable for the higher tariffs, according to Shanghai-based industrial metals information provider SMM.

That would account for around 7.2 percent of China's operating capacity of near 23.5 million tonnes based on the official production figures for November 2013.

Officials at aluminium smelters, though, said capacity that paid the extra fees could be less than 1 million tonnes because many would adjust to use less than 13,700 KWs per tonne.

"Smelters can cut the electricity use by just cleaning their smelting pots more often," said an administration manager at a large smelter.

Electricity accounts for about 40 percent of production costs for smelters in China.

An official at Henan Nonferrous Metals Industry Association said the new fees would not boost production costs to most smelters in Henan. About 70 percent of the 3.8 million tonnes of capacity in China's largest aluminium producing province relied on in-house power plants.

In the power cost scheme that came into effect this month, aluminium smelters that use 13,700-13,800 KWs per tonne to produce one tonne of liquid primary aluminium will be charged an extra 0.02 yuan per KW.

Smelters that use more than 13,800 KWs per tonne in liquid form will be charged an extra 0.08 yuan per KW.

China in July last year also required for production of the liquid form of aluminium that new and upgraded capacity use less than 12,750 KWs per tonne, and that existing smelters reduce power use to less than 13,350 KWs per tonne by end-2015.

CAPACITY

About 4.5 million tonnes of aluminium smelting capacity may come onstream in China this year, according to SMM analyst Zhang Chenguang.

That would boost production to about 28.3 million tonnes this year from 24.9 million tonnes in 2013, creating a surplus of about 700,000 tonnes in 2014, he said.

Domestic aluminium prices may stay weak in 2014 because of the plentiful supply, officials at smelters and analysts said.

"Don't hope the tiered power pricing will help prices. We see the price rising in 2015 at the earliest," a sales executive at a large aluminium smelter said.

Aluminium prices have remained weak despite 200,000-300,000 tonnes of high-cost capacity closing over the past few weeks, the sales executive added.

Domestic spot prices AL-A00-CCNMM have lost a quarter since Jan. 8, 2011, and at about 14,000 yuan ($2,300) per tonne on Wednesday, are down 7 percent from a year ago.

Low prices forced between 1.2 million and 1.3 million tonnes of high-cost capacity to shut in 2013, and another 1 million tonnes of existing capacity may close in 2014, Zhang said.

Currently, China has more than 30 million tonnes of annual capacity, according to SMM and state-backed researcher Antaike. ($1 = 6.0512 Chinese yuan) (Reporting by Polly Yam; Editing by Tom Hogue)